I wrote recently that Canada always seems to find a way to come through even as we shoot ourselves in the foot.
So here's the good:
The country is running a very pro-growth immigration policy and attracting high-skilled workers and entrepreneurs. A high-tech mecca is being established both in Ontario's Kitchener-Waterloo corridor and in Montreal and the surrounding areas. Quebec has emerged from a secular downturn and is now improving its transportation infrastructure while the strengthening provincial balance sheet is allowing for long-awaited tax relief. If it weren't for the language issue, I am certain that the economy there would be in full-fledged boom mode. But suffice it to say that we are in one of these rare periods since the PQ victory in 1976 where la Belle province is a national growth leader.
Elsewhere, Alberta's near-two year downturn is in the rear-view mirror even if it ends up taking a decade for the province to reinvent itself and diversify as Texas managed to do three decades ago. Oil prices thankfully have stabilized just enough to keep production flowing but not enough to entice new energy investment. Cycle-high capacity utilization rates nationally are spurring on stepped-up business spending plans necessary to ease looming production bottlenecks. And the labour market has tightened sufficiently to allow for some much-needed wage gains. This will help act as an antidote for softer bank lending as guidelines tighten due to regulatory shifts ahead and as households move more forcefully to shore up debt-heavy balance sheets.
Here is the bad:
While so many pundits were patting themselves on the back for Canada's sudden emergence as the G7 growth leader this year, it is abundantly evident that much of the spurt was nothing more than an elastic-band effect that owed to a myriad of transitory influences. The end of the plunge in energy-related activity is not the same as a new bull phase, which isn't happening for a whole host of reasons. From an incoherent pipeline policy at the government level to the reality that the term "peak oil" today refers to global demand for fossil fuels, no longer supply. Alberta's recession is over but stabilization at a low level is not quite the same as a sustained growth revival. The recovery in manufacturing exports over the past 12 to 18 months had more to do with the competitive benefits of the dollar's depreciation than anything else, and that boost has proven to be brief given the loonie's appreciation from the springtime lows.
And the ugly:
The uncertainties that the Bank of Canada (BoC) mentioned in its most recent postmeeting press statement have deteriorated since that time. As the rest of the world is at least trying to make efforts to cut taxes (the U.S., Germany and France), Ottawa instead has been heading in the other direction and is continuing in this naive quest to level the playing field instead of focusing on creating incentives to expand the entire economic pie. Fiscal policy in Canada is clearly heading in an anti-growth direction, offsetting the benefits of the fast-tracking of high-skilled foreign labour entry.
At the provincial level, a rising number of jurisdictions, including Ontario, are dramatically raising minimum wages, which panders to populism, but is a horrible economic policy that always backfires since all it does is erode real incomes and/or squeeze small-business profit margins. Electricity costs are poised to soar 70 per cent in Ontario in the coming decade. And, as mentioned, there is no federal strategy to ship our oil or natural gas out of the country.
The U.S. Department of Commerce is singling out Canadian industry with massive tariffs and the NAFTA talks seem to be in disarray – the Americans want to dispose of the dispute-resolution mechanisms which for years have kept protectionist U.S. trade measures at bay. U.S. President Donald Trump may be golfing buddies with Brian Mulroney, but I can tell you he, along with Secretary of Commerce Wilbur Ross, are no friends of ours.
New regulatory rules also are coming our way, which will impinge on the non-CMHC-insured segment of the housing market, and most definitively have a deleterious impact on the high-priced areas of the country, such as the GTA, which already is in corrective mode. New capitalization requirements for the banks, expected next year, will likely also trigger less credit creation and serve as a future constraint on borrowing and spending activity. And all the while, the Bank of Canada has sounded more hawkish than dovish of late, and we are just two or three more rate hikes away from Poloz et al. inverting the yield curve. And for those of us who have a sense of economic history, we all know what that means.
All in, Canada faces some serious headwinds that seem likely to overpower what tailwinds we have going for us. I don't know how it is with all the challenges that cannabis is a top priority for the federal government, unless this is a cash cow for Ottawa to deploy in its pet spending projects. Or maybe one should look at the bright side insofar as the revenue stream from legalizing marijuana will prevent the feds from any further move to drain financial resources from the private sector. Either way, Canada seems rudderless at the moment, and that is a problem, and governments across the country are leaning towards the left and becoming increasingly populist at the expense of economic progress. We shall see the extent to which the drive to attract talent from across the planet will prove to be an offset, all the more so with this gift from the xenophobic approach towards immigration south of the border, to our benefit. All that said, when we have reached a point where the Quebec economy and fiscal finances becomes the envy of the country, we know we are into a whole new era.
What does it all mean from a markets standpoint? Well, it tells me that the BoC really has much more limited room to tighten monetary policy further, regardless of what the Fed ends up doing (and it looks as though Janet Yellen wants to leave her successor a clean slate and to avoid the reputation of leaving whoever it is with a policy stance that could be perceived as being too accommodative). Assuming commodity prices – especially oil – range-trade from here, then I believe that, trading against the greenback, the Canadian dollar will remain stuck in a $1.20-$1.30 (or 76.92-83.3 cents U.S.) band for the foreseeable future. But I sense that the recent corrective phase has not fully played out and, before turning bullish again, I would like to see the top end of that band hold – all the more so since it represents a critical technical threshold at the 200-day moving average.
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David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
David Rosenberg